Presentation on the provisions related to

Auditors

Date : 26th September, 2015

Presenter : Pankaj Farmaha

S. No. Applicable Section1 1392 1403 1414 1425 1436 1447 1458 1469 14710 148

Applicable Sections

Section applicable to both Public & Private companies.

Any Individual or Firm can be appointed as an Auditor. Written consent from the Auditor , Certificate showing due compliance while appointment & he satisfying the criteria of Section 141 is required.

Firm includes LLP.

Appointment shall be done in the First AGM.

Tenure shall be from the conclusion of first AGM till the conclusion of 6th AGM i.e. for 5 years but the appointment shall be ratified in every AGM.

Information of such appointment shall be given to ROC within 15 days. (E-form- ADT-1)

For the purpose of this chapter Appointment includes Re-appointment.

Section 139 (1)

Section 139 (2)

This Section applies on Listed companies or companies prescribed by CG

Refer Rule 5 of the Companies (Audit and Auditors) 2014.

Term for Individual : Max. 1 term of 5 consecutive years i.e. max. 5 years.

Term for Audit Firm : Max. 2 terms of 5 consecutive years i.e. max. 10 years.

Term of Auditors

Firm/LLPIndividual

Max. 5 yrs. Max. 10 yrs.

No appointment for 5 years after the end of the tenure

Both the Auditor and the Company has the right to Resign/Remove from the Company before the expiry of the term.

A Listed Company

All Unlisted Public Companies having paid-up share Capital of Rs. 10 cr. or more.

All Private Limited Companies Having paid-up Share Capital of Rs. 20 cr. or more.

All Companies Having Public Borrowings from Financial Institutions, Banks or Public Deposits of Rs. 50 cr. or more.

Section 139(2) -RULE 5

CLASSES OF COMPANIES

Second proviso to Sub Section 2

Appointment in Current FY

Firm 1 (Appointed as Auditor in ABC Pvt. Ltd.)

Firm 2(wants to be appointed as

Auditor in ABC Pvt. Ltd.)

Mr. X, common Partner on the date of appointment.

Tenure expired in preceding FY

Firm 2 can not be appointed as Auditor in the same company for the next Five years.

Section 139(3)

Company has the power as given to it in shareholder’s meeting :

1. To rotate the Auditing Partner & his team at desired intervals.

2. To conduct the Audit by more than one Auditor.

Section 139(5)

• Auditor of Govt. Co. shall be appointed by CAG.

• Auditor shall be appointed within 180 days from the commencement of the FY till the first AGM.

The Audit committee shall recommend the name of Individual or Audit firm who may replace the incumbent auditor on expiry of his term.

If company is required to constitute an Audit committee, the Board shall consider the recommendation of such committee, and in other cases, the Board shall consider the matters of Rotation of Auditor and shall recommend the appointment of the next auditor by the members in AGM

For the purpose of rotation of Auditor :-I. For Calculating the term Period of Both (an Individual Auditor

as well as a Audit firm) the period for which they have held the office prior to the commencement of this Act shall be taken in to Account.

II. The Auditor/Audit firm to be appointed shall not be in connection with the Auditor/Audit firm who has completed their term in the concerned Company.

Section 139(4)-Manner of Rotation of Auditors by company on expiry of

their term

Rotation of Auditor in case of Individual Auditor

No. of consecutive years for which an Individual auditor has been functioning as Auditor in the same company[in the first AGM held after the commencement of the provisions of section 139(2)]

Maximum no. Of consecutive years for which he may be appointed in the same company (Including transition period)

Aggregate period which the Auditor would complete in the same company in view of column I and II

I II III

5 years (or more than 5 years)

3 years 8 years or more

4 years 3 years 7 years

3 years 3 years 6 years

2 years 3 years 5 years

1 year 4 years 5 yearsSummary: The subsequent appointment of Auditor shall be 3 years or difference whichever is greater.

Rotation of Auditor in case of Audit FirmNo. of consecutive years for which an Audit Firm has been functioning as Auditor in the same company[in the first AGM held after the commencement of the provisions of section 139(2)]

Maximum no. Of consecutive years for which the firm may be appointed in the same company (Including transition period)

Aggregate period which the firm would complete in the same company in view of column I and II

I II III10 years (or more than 10 years)

3 years 13 years or more

9 years 3 years 12 years8 years 3 years 11 years7 years 3 years 10 years6 year 4 years 10 years5 years 5 years 10years4 years 6 years 10 years3 years 7 years 10 years2 years 8 years 10 years1 years 9 years 10 yearsSummary: The subsequent appointment of Auditor shall be 3 years or difference whichever is greater.

Section 139(6)

Firstly, by Board

Information to the Members by the Board.

Within 30 days from

registration of the Company

Members will appoint the

Auditor within 90 days in an

EGM.

If Board fails to appoint the

Auditor within 30 days

First Auditor other than by

Govt. Co.

First right to appoint the Auditor is of Board. Then only the members can appoint the Auditor if the Board fails.

Time period given to the members to appoint Auditor is

not clear.

Section 139(7)

Overriding provision of Section 139(1) &(5)

• First Auditor of a Govt. Co. shall be appointed by CAG within 60 days from registration of the Company.

• In case of failure of CAG to appoint the Auditor, BODs shall appoint the Auditor within next 30 days.

• In case BODs also fail to appoint the Auditor, they shall give such information to members. Then members shall within 60 days from the failure of CAG, appoint the Auditor in an EGM.

Confusing provision as the time period given to the members to appoint the Auditor is not clear.

Casual Vacancy of Auditor in:

Other than Govt. Co.Govt. Co.

Appointment by CAG within 30 days

If CAG fails to appoint

Appointment by Board within next 30

days

Appointment by Board within 30 days

If vacancy is due to resignation

Appointment shall be approved in GM within 3 months

Section 139(8)

Section 139(9), (10), (11)

1. A retiring Auditor shall be re-appointed only if:a. He is not disqualifiedb. He is willing to get appointed as Auditor.c. S.R has been passed for his appointment.

2. If at AGM, Auditor is not appointed, existing Auditor shall continue.

3. If there is an Audit Committee in a Company under Section 177, every appointment shall be made after considering the recommendations of such committee.

Section 140(1)

Removal of an Auditor before end of his tenure

First CG Approval then Special ResolutionSection 140(2)

Resignation by Auditor of other than Govt. Co.

• Auditor to file requisite form with ROC • Resignation Letter to the Company.

Resignation by Auditor of Govt. Co.

• Auditor to file requisite form with ROC• Resignation Letter to the Company.• Letter to CAG stating the reasons of resignation.

Section 140(3)

Non compliance of Section 140(2) leads to penalty of Rs. 50000 to Rs. 500000.

Removal of Auditor by the Company

Board Resolution

Application to C.G

Receipt of Approval by C.G

Within 30 Days

Holding of General Meeting(Pass S.R)

Reasonable opportunity of being heard is granted to

the Auditor

Within 60 Days

File Form ADT-2

Resignation of the Auditor

Resignation by Auditor of other than Govt. Co.

Resignation by Auditor of Govt. Co.

• Auditor to file requisite form with ROC

• Resignation Letter to the

Company.

• Auditor to file requisite form with ROC

• Resignation Letter to the Company.

• Letter to CAG stating the reasons of resignation.

File Form ADT-3

Section 140(4)

Requirement of Special Notice

To appoint Auditor other than retiring

Auditor

To provide for not appointing

existing AuditorExcept where his tenure is

complete

On receiving Special Notice, the Company shall forthwith send the copy to the retiring Auditor.

Auditor, after receiving such notice, shall give his representation and request the Company to notify it to the

members.The Company, if practicable, state that the representation is given AND send the copy to every member OR if copy is not sent, Auditor may ask to read out the representation in

the meeting.

IF the copy of the representation is not sent, the Company shall file it with ROC

If the Auditor abuses his rights under this section

Company or any aggrieved person can

go to the Tribunal (NCLT)

If NCLT is satisfied, representation may not be

sent or need not be read out

Application by CG to NCLT

Section 140(5)

NCLT (suo moto)

If satisfied that Auditor had acted fraudulently, may direct to change the Auditor.

If application is mage by CG to NCLT, NCLT shall within 15 days of such application, order to remove the existing Auditor & give power to CG to appoint new Auditor.

If Tribunal passed an order against Auditor, he shall not be appointed as an Auditor in ANY COMPANY.

In case of a firm, the liability is of all Partners & this provision shall be equally applicable on them.

Section 141Qualification of an Auditor

• Individual: Chartered Accountant only

• Firm: Majority partners practicing in India shall be Chartered Accountants. But, only those partners who are CA, are authorised to sign.

Persons not eligible• Body corporate other than LLP registered under LLP Act, 2008.• Officer, employee of the Company or their partners or employees.• Pecuniary relation of a person, his relative or partner with the

Company, its Subsidiary, Holding or Associate. His relative may hold securities of face value not exceeding Rs. 1 Lakh.

• A person convicted as fraud & 10 years of his conviction are still not elapsed.

• Any person whose subsidiary or associate or any other entity is engaged in consulting & specialized services under Section 144.

• Person in Full time Employment elsewhere.• Holding appointment as auditor in more than 20 Companies(The limit of 20 Companies excludes OPC, small companies, dormant companies and private company having paid up capital of Rs. 100 crores.)If an Auditor vacates office due to disqualification, this is Casual Vacancy

Section 142 Remuneration of Auditor

First Auditor

Board may fix

Any other

Only in GM

Above remuneration shall include expenses incurred in connection with Audit & any facility extended to him but does not include any services

other than Audit service as requested by the Company.

Section 144Services not to be rendered by Auditor

Below mentioned services shall not be provide to the Company, its holding or its subsidiary, whether directly or indirectly.

• Accounting & book keeping.• Internal Audit.• Design & implementation of any financial information.• Actuarial Services.• Investment advisory services.• Investment banking services.• Rendering of outsourced financial services.• Management services.• Cost Audit.

Section 145Auditor shall sign the Audit Report and matters having adverse

effects shall be read out in the GM.

Section 146

• Every Auditor shall attend the General Meeting of the Company.

• Company may exempt the Auditor from attending the General Meeting.

• Auditor may authorize any other person to attend the General Meeting on his behalf. That person shall be qualified as Auditor.

• Auditor shall have the right to be heard in any matter or part of matter which concerns him as Auditor.

Section 147Punishment for contravention

Fine to Company(Section 139 to

146)Rs. 25,000 to Rs.

5,00,000Every officer in default –

Imprisonment upto 1 year OR

Fine of Rs. 10,000 to Rs. 1,00,000

OR WITH BOTHFine to Auditor(Section 139 to

145)Rs. 25,000 to Rs. Rs.

5,00,000

If Auditor willfully defaulted, Imprisonment upto 1 year

OR Fine of Rs. 1,00,000 to Rs.

25,00,000 OR WITH BOTH

• Remuneration will be refunded by the Auditor to the Co.

• CG may authorise any statutory body or authority for damage recovery.

• Such body shall file its report to CG after recovery.

Section 148Cost Audit

• CG may by order, direct the companies indulged in production or providing services as prescribed, that the particulars related to utilisation of material or labour or other items of cost shall also be included in the books.

• Before issuing such order, CG shall consult the regulatory body established under special Act.

• CG, if thinks fit, order for Cost Audit to a Company having turnover of Rs. 35 crore or more. It shall be done by Cost Auditor in Practice.

• Qualifications etc. of normal auditor & cost auditor are mutatis mutandis the same. Cost Audit Report shall be submitted to the Board by Cost Auditor in Practice. Fine & penalty are same.

• Company will show such report to CG within 30 days. If any further information is required by CG, it may call for it by giving reasonable time.

Thank You

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